Consolidation

Consolidation Trends in the Automotive
Aftermarket Industry
July 21, 2014
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Meet the panelists
David Roberts,
Managing
Director,
FOCUS
Investment
Banking
Dave leads the automotive practice at
FOCUS and brings over 25 years of
combined transactional and operational
experience in the automotive space. As
co-founder of Caliber Collision, he raised
more than $125M in capital while
leading 37 acquisitions. Over 15 years
as a deal professional, he has
represented buyers and sellers of
middle-market companies in over $500M
of transactions.
Brian
Devening, Vice
President, The
Fred Jones
Companies
Brian leads M&A for The Fred Jones
Companies, a third-generation family
business with a 90-year track record of
operating automotive businesses in the
U.S. Brian brings over 15 years of
funding businesses as both an
entrepreneur and a transaction
professional, and led TFJC’s sale of
Global Parts Distributor’s in 2009 and
sale of Industrial Specialties in 2012.
Vincent
Romans,
Founding
Partner, The
Romans Group
Vincent is the Principal of The Romans
Group, a firm providing strategic advisory
services to the collision repair, property
and casualty auto insurance, and auto
physical damage aftermarket supply
ecosystem. Vincent brings four decades
of operating and consulting experience
working with domestic and global
companies.
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Agenda
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Overview
Manufacturing
Case Study: Collision Repair Consolidation
Q&A
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Consolidation, Contraction, Convergence
Industry Transformation
Industry Transformation
•  Simultaneous activities:
–  Contraction
–  Consolidation
–  Convergence
•  Results
–  Industry Transformation
–  Structural change
Transformation Impacts:
•  Manufacturers
–  OEM manufacturing & parts,
aftermarket parts, paint
•  Services
–  Collision repair, distributors,
dealerships, software vendors
•  Insurers
•  Investors
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Distribution and Services Consolidation
•  Rental - Technology
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Enterprise acquires National and Alamo
Clayton Venture Group acquires CynCast
Avis buys Zip Car
Hertz acquires Dollar-Thrifty
Enterprise acquires I-go car service, Mobileye
•  Glass-Networks
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Belron acquires Safelite
Kohlberg acquires LYNX Services
Solera/Audax acquired LYNX APD
Boyd Group acquires Glass America
•  Data - Information
•  Parts
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LKQ acquires Keystone
LKQ acquires Greenleaf
LKQ acquires Euro Parts
LKQ acquires AKZO Distribution locations
LKQ acquires Pro Body Parts Canada
Solera/Audatex acquires APU Solutions
LKQ acquires Keystone Automotive Operations Inc.
•  IHS acquires I.L. Polk & Company (CARFAX)
•  Hellman & Friedman invests in CarProof
•  Solera/Audatex acquires New Era Software, See
Progress, Inc., Hyperquest
•  CCC Acquires Injury Sciences, Auto Injury Solutions
•  KKR acquires Mitchel
•  PBE
•  Uni-Select acquires several companies 2014
•  Lakeland Auto Paint and Supply, January 7, 2
locations Florida
•  Metro Paint Supply, February 17, 5 locations,
Illinois and Colorado
•  J. K. Distributors, March 4, 9 locations Virginia
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Insurers Concentration
2013 2009 2006 1999 Change •  Over half of all auto insurance is handled
by just five companies
•  The top 10 insurance companies
combined increased market share by
almost 10 points in 13 years
•  State Farm and Allstate, while down
slightly during this time, still command
almost 30% of the market
•  GEICO passed Allstate’s market share in
2013
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Investors Focused on Consolidation
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Private Equity investors are driving investment, even in consolidating & contracting
industries
Huge pools of idle money chasing limited number of attractive return targets
Recent success of ONCAP exit from Caliber at 5.5-7x initial investment over 5 years was
catalyst in collision repair
Large, $30 B + industry opportunity
•  Recurring revenue, free cash flow and attractive returns on invested capital
High barriers to entry for MSO model
•  Business complexity, performance model and required competitive performance
•  Brand recognition
•  Mature management teams
•  Operational excellence and economies of scale
Insurance industry strategy aligned with MSO strategy
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Major Trends in the U.S. Automotive
Industry
The Manufacture of Light Vehicles is
Changing Dramatically…
And so it will for aftermarket parts and services
§  Remanufactured
§  Oxygen Sensors
Engines and
§  Tires and Wheels
Transmissions
§  Exhaust Components
§  Wiper Blades
§  Lighting
§  Exterior Accessories
§  Batteries
§  Audio Receivers
§  Antifreeze/Performance
Chemicals
§  Interior Accessories
§  Suspension Components§  Brakes
§  Waxes/Polishes
§  Switches
§  Collision/Body
§  Starters/Alternators
§  Steering/Linkage
§  Spark Plugs
Components
§  Motor Oil
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Automotive Parts Aftermarket in the U.S.
2013-2018 ($US Billion)
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Automotive Industry Megatrends
§  Driving OEMs to Innovate and Lightweight
§  New materials, Engine Downsizing, Alternative
Powertrains
§  Fuel economy and emissions reduction efforts favor
vehicle lightweighting
§  Every 10 percent reduction in vehicle mass leads to
a 5 to 7 percent decrease in fuel consumption.
§  Aftermarket must adjust to new materials, parts,
manufacturing processes and new technologies
faster than ever before
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PotenGal Opportunity JV, Invest or Acquire PotenGal Threat Tech Companies New Technologies & Market Entrants Online Sales PenetraGon Mobile Digital Convergence Huge Opportunity For ALermarket Advanced Electronics Changes in Repair Technologies Requires Investment Lots of Cash Cheap Financing Growing Market $$$ Available Trends in the U.S. AutomoGve Industry and Effects on the ALermarket LightweighGng & New Materials Private Equity & Strategics Average Vehicle Age Higher Demand for Repairs Many Vehicles Past Warranty Business goes to ALermarket CAFE Standards MPG & Emissions ALermarket must keep up! New Parts and Processes 18
Raw Materials Used in Major Segments of
Automotive Industry
Structural
(30%)
•  Chassis
•  Body in White
•  Steel
•  HSS
•  Carbon Composites
Source:Lucintel Power Train
(22%)
•  Engine
•  Suspension
•  Transmission
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Steel
Aluminum
Magnesium
Carbon Composites
Titanium
Interior
(23%)
Exterior
(11%)
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Dashboard
Floor
Door panel
Steering
Seat
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Plastics
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Steel
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Glass Composites
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Carbon Composites • 
Magnesium
Door modules
Hood
Trunk lid
Bumper
Steel
Aluminum
Plastics
Glass Composites
Carbon Composites
Electrical/Electronic
& Others (14%)
•  Switches &
Modules
•  Wiring and lamps
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Plastics
Rubber
Glass Composites
Magnesium
% represents weight distribution of total vehicle weight
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Mechanics Must be Technicians
New Market Entrants
Electronics •  Engine controllers and sensors •  Safety systems •  Chassis control •  Measurement and diagnosNcs •  Entertainment •  NavigaNon systems •  Emissions monitoring Body Parts •  Materials •  Adhesives & Fasteners •  Joining Dissimilar Materials •  Repair or Replace ConnecGvity •  Infotainment •  TelemaNcs •  V2V •  V2I •  Autonomous Vehicles •  Big Data AlternaGve Powertrains •  BEV •  PHEV •  FEV •  CNG •  LNG •  Hybrids SoLware & Hardware •  Over 100M lines of code •  Over 60 microprocessors •  Over mile of wiring •  Updates & Recalls ShiL from DIY to DIFM Increasing Complexity of Vehicles OEMs innovaGng Rapidly-­‐Lightweight, Alt. Powertrain, Electronics, ConnecGvity 20
Key Aftermarket Demand Drivers
Lower Cost BeYer Quality §  Generally cheaper than OE §  A]ermarket suppliers can improve upon OE quality Variety of OpGons §  Consumers have mulNple brands to choose from for same parts §  A]ermarket products and services are available through mulNple channels Advanced Parts §  InnovaNon and technology driven by CAFE and ConnecNvity is driving demand for replacement parts and new service technologies Vehicle Age and UIO §  Average vehicle age is over 11 years §  Units in OperaNon in the U.S. will increase annually and exceed 300M by 2018 Economic Factors §  U.S. AutomoNve Industry is right-­‐sized and sales are at pre-­‐recession levels §  Strategic and financial buyers sNll have excess cash for consolidaNon 21
Key Aftermarket Challenges
Low Cost Foreign Parts §  Chinese supplies can o]en undercut pricing §  Large U.S. trade deficit on auto parts CompeGGon from OEMs §  Products becoming more complex, OEMs want to capture more a]ermarket $ §  OEMs are creaNng proprietary processes and materials OEMs bypassing §  Many parts mfgs are set up to drop-­‐ship individual parts to consumers Channel §  E-­‐Commerce is gaining tracNon for auto parts and will increase compeNNon Keeping up w/ Repair EducaGon Choosing the Winners §  Colllision repair centers must invest in new equipment and provide training on new materials and parts §  Electronics, so]ware, and hardware require sophisNcated technicaians §  Many compeNng technologies, only some will survive 22
Case Study:
Collision Repair Industry
Collision Repair Industry today
•  Over 34k shops, $31B revenue
•  Market Segments
–  4 consolidators (largest multi-shop operators, or MSOs)
•  ABRA, Caliber, Gerber, Service King
–  160 other MSOs > $10M
–  24 Dealer MSOs > $20M
–  4 multi-location networks (MLNs)
•  CARSTAR, FixAuto, MAACO, ABRA franchisees
–  Remainder of industry
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Consolidation
•  Consolidation – big are
getting bigger:
–  Larger, more productive/efficient, better
managers/systems, higher margins,
organized
•  Consolidation Drivers:
–  Availability of targets (more sellers, esp.
smaller ones)
–  Low cost of capital (large consolidators
own by large PE firms or public)
–  Insurers reward scale and performance
with more volume, which improves
margins
–  Attractive investment returns (medium
MSOs are expanding with new capital
from PE investors and lenders)
–  Higher margins = more investment in
management, systems, training,
marketing, acquisitions
–  Attractive exit opportunities (smaller
MSOs and independents are merging
and selling to large MSOs)
–  Result = virtuous cycle of greater scale
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Consolidators Focus on Top 125 Markets
Unconsolidated
market examples:
Consolidating market
examples:
Consolidated market
examples:
– Philadelphia, PA $650 million
– Chicago, IL - $1.2
billion
– Denver, CO - $220
million
– Washington, DC $800 million
– Charlotte, NC $200 million
– Phoenix, AZ - $400
million
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622 Independent Shops in Philadelphia Market
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250 DRP Shops in Philadelphia Market
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54 MSO shops in Philadelphia Market
Including only 3 Consolidator shops
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Insurers with larger market shares are
concentrating repairs with MSOs
Best insurance company DRP
networks utilize MSOs that have
proven their capabilities across entire
markets
MSOs are expanding to meet insurers
desires for market coverage/capacity
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13 Caliber Shops in Denver
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Insurers with larger market shares are
concentrating repairs with MSOs
Best insurance company DRP
networks utilize MSOs that have
proven their capabilities across entire
markets
MSOs are expanding to meet insurers
desires for market coverage/capacity
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Plus 9 ABRA Shops, 2 Service King Shops
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Plus 9 Gerber Shops and
4 shops in one remaining independent MSO
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Convergence
•  Insurers with larger market shares are concentrating repairs with MSOs
•  Best insurance company DRP networks utilize MSOs that have proven
their capabilities across entire markets
•  MSOs are expanding to meet insurers desires for market coverage/
capacity
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Benefits and Risks for MSOs
Benefits
Risks
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Competitive
–  Improved market share
–  Improved positioning with insurers
Operational
–  Improved processes, improved quality
–  Improved management, better staffing
–  More efficient utilization of fixed assets
Financial
–  More income, less risk
–  Lower parts, paint, materials costs
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No long-term commitments from insurers
MSOs give guarantees to insurers (discounts,
cycle time, CSI penalties)
Only real commitments from insurers is promise
to bring all MSO shops onto their DRPs
May use volume leverage to extract more
concessions
Risky investment decisions – does expansion,
investments, and improved performance have
long-term ROI or do insurers just keep raising
the bar
–  Preserves or improves margins
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Alternatives for MSOs
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Larger MSOs (the consolidators)
–  Continued rapid growth through acquisitions
–  Possible public offerings to access
expansion capital and reward investors
Other large MSOs have different choices
–  Grow bigger and attempt to thrive in
markets where they compete with
consolidators
–  Sell out now to consolidators
–  Grow bigger then sell to consolidators
Smaller MSOs and independents have fewer
choices
–  Consolidation in their markets may outpace
their ability to grow and diminish their value
–  Selling sooner may be best alternative
–  Defensible opportunities - depends on
market sizes, degree of consolidator
penetration, specialization by MSO
–  Tertiary and rural markets
•  Markets where consolidators are less
likely to expand
–  Special expertise and focus
•  Aluminum
•  Restoration
•  High end brand repairs
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Benefits and Opportunities for Insurers
Benefits
•  Improved retention: CSI, quality, communication
•  Reduced ULAE and LAE: single point of contact,
management by KPIs and reduced field staffing
•  More predictable outcomes
•  Better data for underwriting
•  Possibilities for future savings, process changes
Opportunities
•  Continuing improvement in performance across
MSOs (quality, coverage, self-management
capabilities, discounts)
•  Better alignment with MSOs for future changes in
tech, communication
•  Market leading insurance creates unique
competitive advantages by using MSOs to deliver
on marketing promises
•  Higher-performance provider networks can enable
new offerings (HMO type offering w/ restricted
networks, capitation possibilities with MSOs willing
to take risk)
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Thank you for attending
Consolidation Trends in the Automotive
Aftermarket Industry
Contact Information & Questions
David Roberts
Managing Director
FOCUS Investment Banking
david.roberts@focusbankers.com
(510) 444-1172
Brian Devening
Vice President
The Fred Jones Companies
bdevening@thefredjonescompanies.com
(972) 630-6306
Vincent Romans
Founding Partner
The Romans Group
vincent@romans-group.com
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